How a shale byproduct could open up US oil exports

Condensates—a super-light oil that's a byproduct of the U.S. shale boom—could help open the door to eventual crude exports.

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The relatively obscure fuel source, derived from the light, sweet oil being that's churned out domestically, is used mainly by chemical companies and refiners. Condensates were thrust into the spotlight this week, after the U.S. granted approval to two companies to export limited quantities of condensates

At this point, analysts say the Commerce Department's authorization to ship the light, gassy fuel abroad is more symbolic than substantive. However, the move is being interpreted by some as a sign that a lifting of the domestic ban on most oil exports is less a question of if than when.

Loosening restrictions on condensates "is certainly a baby step, but also a significant step toward lifting the ban totally," said Charles Ebinger, director of the Brookings Institution's Energy Security Initiative. Although the export barrier is still in place for now, "enough pressure is building. Don't be surprised if they lift the ban totally in the first part of the year" after elections have passed, he said.

Key members of Congress have advocated using condensates as a way around the export ban. In April, Alaska Republican Senator Lisa Murkowski said Commerce Department had the authority to "act on its own" to allow the fuel to be shipped abroad.

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One of the reasons condensates have become so closely linked to the export debate is because of the fine line that keeps the liquid from being lumped in with actual crude. The industry standard uses a measure called API gravity, which determines the weight of petroleum relative to water. Substances above a certain threshold—roughly 45 degrees API—are considered condensates.

That means a bit of creative interpretation can make the difference between whether what's being shipped is considered crude or its lighter cousin, noted Paul Rolniak, vice president of energy consulting firm EAI.

At a certain threshold, "some people say its condensate, others say its crude," said Rolniak, adding that shale hotspots are "loaded up" with condensates, making it potentially lucrative for U.S. firms.

"Producing companies like to cram as much light material as they can into crude oil," which can make it more valuable, he added.

In a forthcoming study on the condensate market, Brookings estimates the U.S. could ship 700,000 barrels of condensates a day—which could rise to about 800,000 in 2020 before declining—largely because demand for the substance is limited.

"It can't be used in power generation, and the market isn't that huge internationally, but it's very profitable," Ebinger says. Instability in traditional production hubs such as Libya, Nigeria and Angola has taken condensate supply off the market and created an opening for U.S. companies to sell domestic condensate to European refineries.

To be certain, condensates are a niche market globally, and a small slice of total domestic production. According to a recent analysis from Bentek Energy, the fuel will represent a mere 17 percent of total U.S. oil production by 2023, growing by about 1 million barrels a day over the next decade – a sliver of the more than 8 million barrels of oil produced domestically.

"The challenge will be finding big markets for this stuff," said Sunil Sibal, a senior analyst at Global Hunter Securities. "This is not crude…it definitely has a market overseas but it's not a fungible market."

Still, the substance is produced in abundance in U.S. shale hotspots like Eagle Ford in Texas, Bakken in Montana, and Marcellus in West Virginia and Pennsylvania. For that reason alone, condensate has found itself at the center of a debate about ending the near-total ban on shipping U.S. oil abroad.